Moody’s Japan Debt Downgrade Clashes With S&P in U.S.

By Aki Ito and Christopher Anstey -
Aug 24, 2011

(Corrects value of decline in stocks in second paragraph.)

Investors were unfazed by Moody’s
Investors Service’s decision today to lower Japan’s sovereign
rating, unlike in the U.S., where Standard & Poor’s roiled
global markets when it cut the U.S. AAA ranking for the first
time on Aug. 5.

Yields on benchmark 10-year Japanese government bonds,
known as JGBs, were little changed at 1.02 percent as of 1:32
p.m. in Tokyo, and the yen hovered near yesterday’s close
against the dollar of 76.66, after Moody’s cut Japan’s grade one
step to Aa3. When S&P lowered the U.S. to AA+, the market value
of global stocks tumbled by $761 billion between Aug. 5 and Aug.
12, according to data compiled by Bloomberg, sparking an
investor exodus into Treasuries, with 10-year note yields
falling to a record-low 1.97 percent.

The Moody’s move wasn’t a surprise because Japan’s leaders
haven’t acted to rein in the nation’s debt, said Yoshimasa Maruyama, a senior economist in Tokyo at Itochu Corp., Japan’s
third largest trading company by market value. The difference
with S&P is that Moody’s -- which retains an Aaa grade for the
U.S. -- has incorporated the element of a nation’s ability to
tap investors into its ratings, something that goes beyond
levels of debt, according to Maruyama.

Moody’s cited “weak” economic growth prospects, frequent
changes of government that prevent long-term budget planning,
and a build-up of debt since the 2009 global recession as
reasons for cutting Japan’s grade to Aa3. At the same time, it
said the rating outlook is stable, and the nation will benefit
from low funding costs because domestic demand for government
debt is stable and Japan is the world’s largest net creditor.

U.S. Outlook

By contrast, S&P kept the U.S. outlook “negative,” even
as the country raises cash at historically cheap levels: 10-year
Treasury yields averaged 3.16 percent this year, against about 4
percent the past decade.

“The fiscal situation in the U.S. is deteriorating, but
the U.S. hasn’t lost its triple-A capacity to procure money,”
said Maruyama. Similarly, the ability of Japan to tap domestic
investors in selling debt means that while “Japan’s fiscal
situation is deteriorating, it’s not like the market’s headed
for a collapse,” he said.

World markets will continue to focus on the “nervousness”
sparked by the S&P move, Maruyama said.

Post-S&P Carnage

The S&P decision on Aug. 5 to cut the U.S. to AA+ with a
negative outlook was a “blow to confidence” because it raised
questions about the core of the financial system, Mohamed A. El- Erian, Pacific Investment Management Co.’s chief executive and
co-chief investment officer, said in an Aug. 8 radio interview
on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.

While S&P said the U.S. was less creditworthy, investors
snapped up Treasuries, driving up prices and sending yields to
record lows. Yields on the bonds fell 21 basis points to 1.174
percent, according to Bank of America Merrill Lynch’s U.S.
Treasury Master index.

The S&P 500 Index (SPX) of American shares swung by at least 4.6
percent in the four trading days following the change. Gold rose
5 percent.

Equity investors shrugged off today’s Japan downgrade, with
the Nikkei 225 (NKY) Stock Average dipping 0.1 percent as of 1:44 p.m.
in Tokyo -- less than the 0.3 percent drop in the MSCI Asia
Pacific index.

“We’ve been ignoring Moody’s,” said Taketoshi Tsuchiya,
Tokyo-based director of credit trading at Barclays Capital Japan
Ltd. “Do you want to sell something that is rated at the range
of Aa with a stable outlook?”

‘Clear for All’

Goldman Sachs Group Inc. economists including Tokyo-based
Naohiko Baba said “Japan’s finances and debt are basically
clear for all to see.” The Moody’s “downgrade does not come as
much of a surprise,” they wrote in a note.

Moody’s put Japan on review in May, calling on the
government to step up efforts to narrow the budget gap. S&P
lowered the nation’s grade to AA-, equivalent to the current
Moody’s grade, in January, and has the nation under review for a
further cut. Fitch Ratings has Japan at AA- with a negative
outlook.

Contrast in Reaction

Prime Minister Naoto Kan’s government had no reaction to
the Moody’s announcement, with Finance Minister Yoshihiko Noda
declining specific comment on the news when asked by reporters
in Tokyo today. By contrast, the Obama administration criticized
the S&P move, with the Treasury Department telling the company
it had overestimated future national debt by $2 trillion.

S&P said the discrepancy didn’t affect its decision, and
based its conclusion on the U.S. government becoming “less
stable, less effective and less predictable.”

Warren Buffett, the world’s most successful investor, said
the U.S. should be “quadruple-A.” The billionaire chairman of
Omaha, Nebraska-based Berkshire Hathaway Inc. said the decision
doesn’t reflect any inability of the U.S. to pay its debts.

U.S. Vice President Joe Biden predicted the U.S. and Japan
would both rebound from their respective challenges, speaking
yesterday in Tokyo.

“While you’re struggling to deal with one of the greatest
natural disasters any country has faced and we are dealing with
getting our budget in order, there are voices in the world who
are counting us out,” Biden said on the final leg of an Asia
tour. “They’re making a very bad bet.”